Tackling tax avoidance by multinationals
Thomas Pope
@TheIFS
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#IFSGB2016
Context: multinationals in the political spotlight
• Significant political action in the UK
– Prominent interventions by Public Accounts Committee in last few
years
– Numerous UK Corporate tax policies over the last 5 years
– Business roadmap to be released with the Budget
• OECD Base Erosion and Profit Shifting (BEPS) project completed in
October 2015
– A large multilateral attempt to update the international tax rules
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How big is the problem?
• HMRC defines avoidance as:
• ‘bending the rules of the tax system to gain a tax advantage
that Parliament never intended...operating within the letter –
but not the spirit – of the law’
• Hard to know the scale of avoidance
• OECD estimate avoidance cost at between $100 billion-$250
billion worldwide: 4-10% of global corporate income tax revenues
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Corporate tax receipts % GDP, 1979–2014
5.0
4.5
4.0
Percent of GDP
3.5
3.0
2.5
2.0
1.5
1.0
0.5
United Kingdom
Notes and sources: See Figure 8.2 of Green Budget document
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OECD average
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
0.0
How do we tax multinational companies? (1)
• We need to divide profits between different jurisdictions
• The system does not try to tax profit based on sales
• The principle of the international tax system is that we should tax
profits at source; where the value is created
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How do we tax multinational companies? (2)
Pharmaceutical drugs
Ideas
Transfer price
££
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£
How do we tax multinational companies? (3)
• Note that this system, even when applied perfectly, can lead to:
– Large sales and low tax payments
– Large reported profits in low tax jurisdictions
• However, in practice there are avoidance opportunities
– Hard to calculate transfer prices
– Other difficulties arise at the boundaries between tax systems
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OECD Base Erosion and Profit Shifting (BEPS)
project
• 2 year multilateral attempt to improve the international tax
system, relying on international consensus
• Addressed 15 ‘action points’ looking at different elements of the
rules. Either:
– Changes that all countries have agreed to enact (eg transfer prices)
– OR recommended changes that governments can choose to follow
• Next: implementation
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Improvements for the UK
• Country by country reporting will help countries target resources
– But it won’t mean avoidance can always be identified
• Changes to the definition of taxable presence in tax treaties
– While it ‘moves the goalposts’ the incentive to cheat it remains
• UK to implement ‘anti-hybrid’ rule from 2017
– Though as a recommended best practice it won’t be implemented
everywhere
• Patent boxes to be modified by July 2016 to be more closely
linked to real activity
– The patent box remains a poorly targeted innovation policy
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George’s big BEPS decision – interest deductibility
• Many countries, including the UK, have rules to restrict interest
deductibility
• UK has consulted on a change to interest deductibility,
announcement expected at the budget
• OECD rule would restrict interest deducted to a proportion of
operating profit
• A more stringent rule than the current UK provision
• Tradeoff between preventing avoidance and distorting genuine
activity
• Especially for business models that include large amounts of debt
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The incentive to compete – the elephant in the
room?
• Second tradeoff: between preventing avoidance and maintaining
competitiveness
‘The UK’s current interest rules, which do not significantly restrict
relief for interest, are considered by businesses as a competitive
advantage’. Corporate tax roadmap, 2010
• Minimum standard vs recommendation: countries unwilling to
sacrifice competitive advantage
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Summary: where do we go from here?
• The BEPS process is an impressive project, but is not a silver bullet
• Underlying problems remain unaddressed
• Only time will tell how effective these measures will be
• Countries face a trade-off between competition and collaboration
• Uncertain effect on UK revenues
• EC published anti-avoidance plan on 28th January 2016
• Depending on how effective these measures prove, we may want
to consider more radical changes, eg allocate profits based on
location of sales
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